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Aquarius platinum: the case for cautious optimism

Why a $61m loss in SA might well be a case for positivity.

GRONINGEN (MINEWEB) – A $61m loss is not usually grounds for optimism. But, in the context of South Africa’s beleaguered platinum sector it might just well be.

For the year to end June, 2013, Aquarius Platinum announced a headline loss of $61m, down from a loss of $154m in the previous year. If one includes tax and the $226m in impairments announced during the year, that loss rises to $228m.

Aquarius CEO, Jean Nel, described the year as an exceptionally challenging one during which the group, “had to close loss-making mines, face disruptive industrial action, implement an owner-operator model at Kroondal and revise the hanging wall support regime. Further, we had to contend with on-going regulatory uncertainty in an environment in which metal prices continued to materially underperform consensus forecast.”

And, according to Nel, many of these factors are likely to continue as the group expects the difficult operating conditions and low metal prices to continue in the new financial year.

So far, so little to be positive about. But, if one breaks out the numbers a little more, it is evident that the closure of the group’s high cost Everest and Marikana mines have helped improve the group’s outlook.

The closure of the two mines helped push production lower by 86,295 PGM ounces, which resulted in a 24% decline in revenue to $371m for the year.

But, notably, the group said, profitability at an on-mine EBITDA level rose 145% to 70m for the full year.

As Aquarius notes, the financial year’s result was one of two contrasting half years. For the first 6 months of the year, the group saw a net operating cash outflow of $38m.

“In contrast, the second half of the financial year was one of consolidation of the gains achieved in the first half. The second half returned an EBITDA of $48 million, a 125% increase over the first six months due to higher production, lower operating costs and the conclusion of the issues referred to above [primarily the shift to owner-operater model at Kroondal and the closure of Everest and Marikana]. Net operating cash for the second six months was a net operating inflow of $60 million, a $98 million turnaround.”

The cost line also improved, as a result of the closures.

In dollar terms, the group said, average unit cash costs were $912 per 4E ounce, 19% lower than the previous comparable period, while, the average cash cost per PGM ounce at the group’s South African operations fell 15% to R8,242, equivalent to $936 per PGM ounce at the average Rand exchange rate for the year.

“The decrease in US dollar terms was 25%, as a result of a weaker Rand relative to the dollar during the year,” the group said, while “a 13% increase in PGM production in South Africa from operational mines also contributed to lower unit costs as the ability to spread fix production costs increased.

At its Zimbabwean operations, however, cash costs per PGM ounce rose 13% to $867.

This increase the group said, was driven “by inflationary factors affecting inputs such as labour, steel, diesel, surface lease fees and certain once-off expenses including an inventory write off and stockpile build up costs following the May 2012 fire.”

However, while the group does seem to be improving, it must be taken in the context of the sector as a whole. As Investec Securities commented in a note out this morning, “While the EBITDA figures demonstrate some operational improvement YoY, the overall result reflects the fact that the platinum sub-sector is struggling against an environment of poor commodity prices and increasing cost pressures, not least from union demands. We do not see an end in sight for the troubles of the South African platinum industry and, it would appear, neither does the CEO.”

Such comments are backed up by Aquarius Platinum’s peer, Northam Platinum that put out a trading update this morning as well.

While Northam announced that it expects earnings and headline earnings per share for the year ended 30 June 2013 to be “between 60% and 70% higher than in the previous comparable period” on the back of higher sales volumes and a higher average basket price realised during the period under review, it did remain cautious about future prospects

“Northam’s operations remain vulnerable to, inter alia, factors affecting the South African general mining industry and, in particular, the platinum sector. At the time of this announcement and for the foreseeable short to medium term, the South African mining industry remains engaged in industry wide wage negotiations, as frequently reported on in the public domain and through press commentary. Should such wage negotiations result in industrial action, Northam’s operations may be affected. Northam therefore remains cautious about production and other estimates, until such time as clarity in the mining industry in general and in respect of Northam’s operations specifically has been achieved.”

Clearly the sector is no where close to being out of the woods but, the benefits of lower cost production are becoming evident and there is a sense of optimism that things could eventually get better.


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